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Editorial: There is a Hole in the Fiscus

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Whatever the outcome of the deliberations on who should be South Africa’s finance minister, it is an inescapable fact that there is a massive hole in our national finances. Estimates vary but the shortfall in revenue over expenditure is understood to be around R50 billion. Worryingly, the unbudgeted pledge of ex-President Zuma for free higher education is expected to add a further R12-15 billion to that funding gap.

Set against a backdrop of a relentlessly escalating budget deficit over the past few years this presents the country’s top leadership with the difficult and unenviable task of generating more revenue to fill the hole without compromising efforts to stimulate the much needed economic recovery that our citizenry so desperately yearns for. But where will those revenues come from?

As the tabling of the annual budget in parliament nears, there is much speculation about what measures the Minister of Finance will announce to “fill the hole”. One of the simplest measures would be to increase value-added tax since even a one per cent increase would generate a significant part of the revenue shortfall. But VAT is a regressive tax taking proportionately more from low-income earners than high-income earners – not good in one of the world’s most unequal economies.

Another approach could be not adjusting tax brackets for inflation creep – the phenomena where inflation linked increases in remuneration inadvertently push taxpayers into higher tax brackets. This could also generate significant additional revenue but would be unpopular amongst a middle-class that is already under financial duress.

Increasing marginal tax rates amongst high income earners could provide some breathing space and much needed revenue with the advantage of sending a signal that the new President is serious about redistribution. However, the marginal rate was only increased from 41% to 45% this time last year. A wealth tax may be a better idea but then again we already have a version of this in the capital gains tax.

There is speculation that we will see another increase in the fuel levy, another relatively straightforward way of raising additional revenue. But this always comes with the inflationary effect of increased transport costs right through our economy. We can possibly expect the imposition of the so-called “sugar-tax”, now provided for in law and increases in the so-called “sin-taxes” on alcohol and tobacco products are standard fare in any budget.

So what will it be? As the old adage goes, “time will tell”. By this time tomorrow we will know which path our fiscal planners have chosen to take. Make no mistake that the predicament in which we find ourselves as a nation is very serious. Not only is our national debt to GDP ratio well above 50% but government has had little choice in recent years but to bail out a number of underperforming State-owned enterprises. The gigantic R300 to R400 billion in government guarantees issued to help protect and sustain the SOEs leaves our national economy wide open and vulnerable to the collapse of even just one of these enterprises. That the PIC has had to bail out ESKOM is indicative of the inability of the fiscus to go any further itself.

The situation with SOEs and the growing national deficit is untenable but hopefully manageable. Targeted interventions and collaboration with the lenders should see a turnaround in the fortunes in SOEs. Our budget deficit and our national debt are both manageable if we can restore our economy to a state of good health. For this reason a pro-growth budget tomorrow is essential.

We should be reminded of a quote this time last year by the then Minister of Finance, Pravin Gordhan: “Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage. But an austerity burden will not be placed on our people.” We should all embrace the fiscal challenge that lies ahead if the citizenry is to witness and experience better economic times and not be forced to endure the hardship and austerity that will result if we can’t fix the hole in our national finances!

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